Firms are product distributors if they offer, sell, recommend, advise on, arrange, deal, propose, or provide a product or service, including at renewal.[1]
Obligations of product distributors
Product distributors are subject to the products and services outcome.[2] Put simply, they must understand the products or services they distribute. This requires all distributors to get certain information from manufacturers. More specifically, distributors must:
- understand the characteristics of the product or service,
- understand the identified target market,
- consider the needs, characteristics and objectives of any customers with characteristics of vulnerability,
- identify the intended distribution strategy, and
- ensure the product or service will be distributed in accordance with the needs, characteristics and objectives of the target market.[3]
Firms should not distribute a product or service if they do not understand it sufficiently.[4]
Product distribution arrangements
Distributors must have (and keep under review) distribution arrangements for each product or service they distribute.[5] The distribution arrangements must:
- avoid causing and, where that is not practical, mitigate foreseeable harm to customers,
- support management of conflicts of interest, and
- ensure the needs, characteristics and objectives of the target market are taken into account.[6]
In addition, a distributor should identify or create a distribution strategy that is consistent with the identified target market.[7] Moreover, if a distributor sets up or implements a specific distribution strategy to supplement the manufacturer’s strategy for a product or service, it must be consistent with the manufacturer’s intended distribution strategy and the identified target market.[8]
Product distributor reviews
Distributors must regularly review whether their:
- distribution arrangements are appropriate and up-to-date, and
- products and services have been distributed to customers in the target market.[9]
When deciding how regularly to review a product or service, firms should consider factors such as:
- the nature and complexity of the product or service,
- the nature of the customer base, including whether there are significant numbers of customers with vulnerable characteristics, and
- any indicators of customer harm.[10]
If it identifies an issue as a result of a review, a distributor must:
- make appropriate amendments to the product distribution arrangements,
- take appropriate action to mitigate any harm that has been identified and prevent any further harm, and
- promptly inform all relevant persons in the distribution chain about any action taken.[11]
Distribution Chains
There are three basic parties within any distribution chain:
- Product manufacturers,
- Co-manufacturers, and
- Product distributors.
Each firm within a distribution chain must have a clear view on the role that it performs.
Product Manufacturers
“Manufacturers” are firms that create, develop, design, issue, manage, operate or underwrite (for insurance or credit purposes only) a product or service. [12]
Firms that purchase books of closed products or services from an original manufacturer will be regarded as “manufacturers” due to the fact that they will be ‘managing, operating or carrying out activities’ in relation to the product or service in question. As such, they will be expected to continue to review customer outcomes, as required by the Consumer Duty.[13]
Product manufacturers must develop a distribution strategy that is appropriate for the target market.[14] As part of this process, firms should consider what distribution channels are appropriate for the target market. For example, a firm manufacturing a particularly complicated product might consider only allowing the product to be sold with advice or by distributors with specific knowledge, expertise and competence to understand the features of the product.[15]
Co-manufacturers
More than one firm may be involved in the manufacture of a single product. It is also possible that intermediaries may be co‑manufacturers, for example if they set the parameters of a product and commission other firms to build it.[16]
Where firms are co-manufacturers of a product or service, they must have a written agreement outlining their respective roles and responsibilities. This agreement should clarify which firm is responsible for deciding a particular issue and provide confirmation of which firm is responsible for meeting different aspects of the Consumer Duty.[17]
Product Distributors
Firms are product distributors if they offer, sell, recommend, advise on, arrange, deal, propose, or provide a product or service, including at renewal.[18]
Information sharing within distribution chains
General
The FCA recognises that distribution chains for retail market business can be long and complicated. This can cause issues for product manufacturers in obtaining relevant information about customer outcomes. Some product manufacturers do not have full visibility of the distribution chain or the end customers. In these circumstances, the FCA expects firms to do what is reasonable.[19]
Manufacturer obligations to share information with distributors
Product manufacturers must provide each distributor with adequate information in good time to enable the distributor to comply with its own obligations with respect to the Consumer Duty. The information to be made available includes all appropriate information regarding the product and the product approval process from time to time to enable the distributor to comply with the obligations under PRIN 2A.3.16R (which require distributors to obtain information from manufacturers).[20]
More specifically, manufacturers must make all appropriate information available to distributors to:
- understand the characteristics of the product or service,
- understand the identified target market,
- consider the needs, characteristics and objectives of any customers with characteristics of vulnerability,
- identify the intended distribution strategy, and
- ensure the product or service will be distributed in accordance with the target market.[21]
Distributor obligations to share information with manufacturers
In general, distributors are NOT expected to share information without being asked. [22] However, to support product reviews carried out by manufacturers, a distributor must, upon request, provide a manufacturer with relevant information including, where appropriate, sales information and information on the regular reviews of product distribution arrangements.[23]
In addition, as an exception to the general approach, where appropriate, distributors must “promptly” inform other relevant parties in a distribution chain if:
- they take remedial action following a review of distribution arrangements, or
- they identify consumer harm.[24]
In order to avoid a contravention of data protection laws, wherever possible, distributors should share information in an anonymised or aggregate form.[25]
Manufacturer obligations to obtain information from distributors
Product manufacturers must seek information from distributors in order to support their product review processes. However, manufacturers should remain mindful of the obligations on distributors to provide anonymised or aggregate data wherever possible. Questions manufacturers may wish to ask distributors could include:
- Are there any issues identified by the distributor in relation to the target market assessment?
- Are there any issues identified by the distributor in their review of distribution arrangements for a product or service?
- Have any issues been identified by, or for, customers with characteristics of vulnerability? What are they at a high level (not identifying individual customers)?
- Have any sales outside the target market been identified in the distributor review? In what way are they outside the target market? What harm is foreseeable?
- What proportion of customer hold the product for the recommended timescale (if any)?[26]
Distribution chains involving non-UK distributors
Where a distribution chain includes non-UK distributors (which are not subject to the Consumer Duty), UK manufacturers may not be able to obtain relevant information from them. In this case, UK firms should consider what is reasonable in the circumstances in terms of gathering information. For example, they could use any information that they do have available to support their work, but they would not be expected to obtain information from firms that are not subject to the Consumer Duty.[27]
Distributor obligations to obtain information from manufacturers
A distributor must ensure that the product distribution arrangements it enters into with a product manufacturer contains effective measures and procedures to obtain sufficient, adequate and reliable information from the manufacturer about the product to:
- understand the characteristics of the product,
- understand the identified target market,
- consider the needs, characteristics and objectives of any retail customers in the target market with characteristics of vulnerability,
- identify the intended distribution strategy for the product, and
- ensure the product will be distributed in accordance with the needs, characteristics and objectives of the target market.[28]
Liability in the context of distribution chains
Unless there are regulatory requirements, or unless contracts between parties in a distribution chain require it, firms are responsible only for their own activities and do not need to oversee the actions of other firms in a distribution chain.[29] Specifically, unless they have an oversight role, manufacturers are not responsible for the activities of distributors.[30] However, there are some limited exceptions to this approach, for example where a firm acts as a principal firm.[31]
Communication within distribution chains
A firm must provide information in good time to another firm in the same distribution chain, where such information is:
- requested by the other firm and is reasonably required, or
- otherwise considered to be reasonably required by the firm, so that it can be communicated to retail customers.[32]
Communication issues identified within distribution chains
Where a firm identifies or becomes aware of a communication produced by another firm in its distribution chain that is not delivering good outcomes for retail customers, it must promptly notify the issue to the relevant firm in the distribution chain.[33]
Firms should also notify the FCA if they become aware that another firm in the distribution chain is not complying with the Consumer Duty.[34]
Next time
Next time, we’ll be turning our attention to look at compliance with the Consumer Duty within the context of product communications, so stay tuned!
[1] FG22/5, 6.56
[2] FG22/5. 6.61
[3] FG22/5, 6.59
[4] FG22/5, 6.60
[5] FG22/5, 6.57
[6] FG22/5, 6.57; PRIN 2A.3.14R
[7] FG22/5, 6.62
[8] FG22/5, 6.63; PRIN 2A.3.17R
[9] PRIN 2A.3.19R ; FG 22/5, 6.66
[10] FG 22/5, 6.67
[11] FG 22/5, 6.78
[12] See definition of “manufacturer”
[13] Policy Statement PS22/9, 2.24, FG22/5, 2.41 and 2.42
[14] FG22/5, 6.52
[15] FG22/5, 6.52
[16] Policy Statement PS22/9, 2.24, FG22/5, 6.4. See also the definition of “manufacturer”
[17] PRIN 2A.3.11R; FG22/5, 2.28 and 6.11, FG22/5, 6.12
[18] FG22/5, 6.56; Policy Statement PS22/9, 2.24. See also the definition of “distributor”.
[19] FG22/5, 2.22
[20] PRIN 2A.3.12R
[21] FG22/5, 6.54
[22] FG 22/5, 6.70
[23] PRIN 2A.3.18R; FG 22/5, 6.68
[24] FG 22/5, 6.71
[25] FG 22/5, 6.73
[26] FG 22/5, 6.74
[27] FG22/5, 2.40
[28] PRIN 2A.3.16R
[29] Policy Statement PS22/9, 2.15
[30] FG22/5, 6.53
[31] Policy Statement PS22/9, 2.18
[32] PRIN 2A.5.15R (see page 131)
[33] PRIN 2A.5.14R (see page 131)
[34] FG22/5, 8.66; PRIN 2A.9.17R
